Business Studies May/June 05 P3

Topics: Price elasticity of demand, Supply and demand, Elasticity Pages: 7 (1525 words) Published: May 19, 2013
This document consists of 5 printed pages and 3 blank pages. SP (SJF3336) S76942/3
© UCLES 2005 [Turn over
General Certificate of Education
Advanced Level
Paper 3 Case Study
May/June 2005
3 hours
Additional Materials: Answer Booklet/Paper
If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper.

You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A
Answer all questions.
Section B
Answer one question.
At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question. The businesses described in this question paper are entirely fictitious. Candidates are advised to spend 40 minutes on Section B.
The current situation
Wotton College is a private school with 300 students. It charges a fee of $2000 per year for each student. It is owned by Paula Njie who is also the Head of the school. Paula aims to make a profit every year but the last twelve months have been very difficult for the school. Costs have risen, mainly because of over-spending by subject departments. Income from fees has increased but not by enough to cover these costs. As a result, the school’s equipment has not been updated recently and some of the buildings are poorly maintained. Wotton College cannot teach more than 320 students in the present buildings.

Paula increased student fees in January 2005. She is worried that another increase in 2006 could actually reduce revenue. The Private School Association has estimated the following elasticities of student demand for private schools in Paula’s country: Price (student fee) elasticity of demand: –1.2

Promotion spending elasticity of demand: 2.3
Income elasticity of demand: 2.0
Staffing issues
The turnover of teaching staff at the school is high. This has contributed to the declining examination success rate of students. Teachers who left the school last year complained about Paula’s style of management and the lack of a bonus system for good results. One teacher commented that, “Although we are all professionals we are treated worse than the students. At least Paula discusses new ideas with the Student Council before making changes. With us, the first we hear of new policies is when we read about them on the staff noticeboard. She does not even use the school e-mail system”. A Head of Department who resigned said, “We never knew how much we had to spend on textbooks. We were always being criticised for results even when we did well. We did our best with old buildings and unsafe equipment.” Options for the future

Paula is considering three possible options to make Wotton College profitable. Option 1 – Raise fees and cut costs
She could raise fees by 10% from January 2006 and reduce teachers’ salaries by 5%. Material costs could be cut by 10% by purchasing cheaper materials and books. Paula has drawn up a forecast Profit and Loss Account (Appendix A). She plans to calculate the impact her proposed changes have on net profit in 2006, assuming no changes in promotion spending or other costs. Option 2 – Take over another school

Paula has been told that Midvale, another school in the town, is for sale. The owners have decided to retire. By taking on a partner as an investor, Paula could buy the school which has large grounds and some new buildings. Expansion in this way should lead to some economies of scale. Paula might be able to force suppliers to cut their costs. It might be possible to close the existing Wotton College buildings and just use the Midvale site....
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